John Bel Edwards proposes making more businesses pay, while lowering income taxes for most people

Updated on Mar 30, 2017 at 10:07 AM CDT

Louisiana Gov. John Bel Edwards talks about the $300 million state budget deficit during a special session of the Louisiana Legislature in Baton Rouge Monday, February 13, 2017. (Photo by David Grunfeld, NOLA.com | The Times-Picayune)

Gov.
John Bel Edwards
said he is looking to shift the tax burden from individuals to businesses and raise more revenue for state government through his proposal to overhaul Louisiana's tax structure released Wednesday (March 29).

"The average, middle-class income earner paid more income taxes than some of our largest companies," in 2015, said Edwards Wednesday, citing a study done by former Gov.
Bobby Jindal
's Department of Revenue secretary on corporate tax payments.

The plan pushes a combination of income, sales and business tax changes aimed at making more companies and wealthier individuals who enjoy tax breaks and exemptions now pay more. It is a big departure from the income tax increase Edwards was leaning toward proposing a few months ago, and a twist on the business tax proposal that was being discussed by Edwards' staff as recently as last week.

If the governor was attempting to hit a "run" with his tax plan previously, he's now gearing up for a try at a "grand slam," said Robert Travis Scott, president of the Public Affairs Research Council of Louisiana, a nonprofit group that examines state fiscal policy. "The legislators just got a wake-up call," said Scott, after the press conference where Edwards unveiled his plan.

The governor's proposal calls for lowering Louisiana's state sales tax rate by 20 percent and primarily replacing it with a new tax on business transactions -- known as a gross receipts tax -- that is aimed at catching thousands of companies who don't currently pay anything in corporate taxes to the state.

The sales tax rate, though lower, would also apply more to goods and services than it does currently. Items such as massages and landscaping would now be taxed, as they are in Texas, according to information provided by the governor's office. Some sales tax exemptions that have been inserted into state law would also be eliminated.

Income taxes for 90 percent of people who pay them would also be lowered, under Edwards' plan. Only people making over $140,000 per year would pay more, because a federal income tax deduction that wealthier people use would be scratched, under his strategy.

Other tax breaks would be sunset by the governor to generate money, including those that allow people to get a break for making donations to public elementary and secondary schools; that compensate businesses for employing people who were out of work; and those for musical and theatrical productions, according to a document provided by the governor's office.

The governor was trying to find an alternative source of revenue for the $1.3 billion in temporary taxes set to expire on June 30,2018. At least $880 million of these temporary taxes came from a sales tax hike Louisiana implemented last year, that the governor does not wish to renew. The state currently has the highest average sales tax rate in the country -- when local sales taxes are factored into the equation -- and the tax generally hurts poor people more than those who are wealthy.

But Edwards' tax plan wouldn't just replace revenue currently generated by the sales tax. The plan would raise taxes overall too, such that Edwards' could fund an additional $440 million worth of spending for the budget cycle that starts July 1. The additional money would go toward programs the governor considers a priority -- like the TOPS college scholarship fund, transportation projects and state employee raises.

The prospect of raising taxes is not likely to be well-received by the Legislature, especially in the conservative Louisiana House. During House budget hearings this week, legislators have emphasized that more money needs to be cut from the state budget, though they haven't offered much in terms of specific proposals. Still, the House is unlikely to be receptive to Edwards' proposal to increase spending next year, even if they want to replace the higher sales tax rate currently in place.

The most controversial aspect of Edwards' plan is the proposed tax on business transactions, which will hit thousands of businesses that currently pay no corporate income taxes. The gross receipts tax -- which Edwards is calling a commercial activity tax -- would apply to all businesses with gross receipts over $1.5 million. Those businesses with gross receipts between $150,000 and $1.5 million would also also pay a flat tax between $250 and $750 that they hadn't paid previously.

Louisiana business groups are already urging caution about the plan, saying Louisiana businesses have lost jobs over the last three years and already been asked to pay more in taxes. "The Governor's latest tax proposal seems tone deaf to economic reality," said Stephen Waguespack, president of the Louisiana Association of Business and Industry, the state's largest, most influential business group.

The Tax Foundation, a Washington D.C. think tank, also slammed Edwards' consideration of the gross receipts tax earlier this week, calling it regressive and economically harmful.

"Gross receipts taxes lead to higher consumer prices, lower wages and fewer job opportunities," said Nicole Kaeding, an economist with the organization.

Yet Edwards pointed to a 2015 study, again done by the Jindal administration, that showed most businesses in Louisiana weren't paying an income tax of any kind thanks to exemptions, tax breaks and other exceptions. Of Louisiana's 149,000 corporate tax filers in 2015, around 129,000 did not pay any income tax at all, Edwards said. The proposed commercial activity tax would force them to contribute.

Some of those who were skeptical of the commercial activity tax have also softened their stances, after seeing that the governor is proposing it in conjunction with eliminating some income tax breaks. Jan Moller, head of the left-leaning Louisiana Budget Project, had been concerned a gross receipts tax would hurt poor people too much. But with the income tax changes the governor is proposing, he has stepped back from that criticism.

"This is a lot more encouraging," Moller said. "There's a lot more to absorb."

Moller isn't the only one who will have to absorb the plan. The commercial activity tax is a relatively new concept that many legislators, budget experts and other state government watchers don't know much about yet. In fact, one of the criticisms of the governor's plan has been that he hasn't left enough time for people to familiarize themselves with it. It has to be taken up in the legislative session that starts April 10, in less than two weeks.

Edwards also didn't release all of the details of his tax plan Wednesday. The specific bills that would make up the tax plan have not been identified yet.

But the governor said he had to scrap his original strategy for a tax structure overhaul, which involved replacing the higher sales tax rate with higher income tax rates. The governor's task force on the best tax and budget strategies had recommended a higher income tax, but it became clear that wasn't politically feasible, he said. Legislators made it clear that such a proposal would never survive.

"Simply put, there was not an appetite -- there is not an appetite -- in the Louisiana Legislature to do anything with the individual income tax," Edwards said.

Yet it's not clear yet that this proposal will survive either. Several legislators are skeptical of a gross receipts tax concept. Furthermore, many House member believe the governor needs to make more of an effort to cut the state's spending plan, though they haven't given many specifics on where those cuts should take place yet.

The governor does not believe budget cuts will create financial stability for Louisiana. If lawmakers don't do anything to fix the tax system, they will end up coming back into a special session after the coming regular session to deal with a new state financial crisis. "We cannot pretend that we can cut our way out of this problem," he said.

Still, his proposal is complicated. It will involved multiple bills, including some that will require at least two-thirds of the Republican Legislature's support. Some of the income tax deductions he wants to eliminate would also require Louisiana voters' approval. At least one of those -- the elimination of a corporate tax income deduction -- has gone before the voters before, and failed.